Current TV Sold As Cable Universe Threatens to Shrink (Analysis)

It isn’t a coincidence that Time Warner Cable dropped Current TV from its line up just as the fledgling cable service announced Wednesday it was being sold to Al Jazeera. If anything, the sale accelerated what was an inevitable process.

Cable television is undergoing a shift away from the era in which the goal was the 500 channel universe. It is a sea change in the media landscape that could impact not just Current and Al Jazeera but dozens if not hundreds of medium sized and small channels, most of which are independently owned and distributed.

On Tuesday, even before the sale of Current TV, Time Warner Cable dropped the Ovation network, citing it as “among the poorest-performing networks” it offers. It also said it is seriously considering eliminating more than 50 other channels, including such well-known brands as E!, Encore and Lifetime. The message might be a negotiating ploy to get lower sub fees, but there is little question that television distributors are reevaluating how they do business as the cost of programming soars. Rising sports rights fees, as well as increased program costs and demands from broadcasters such as CBS and Fox for sharply higher retransmission payments are to blame.

“You need to find some fat somewhere to cut, and you have all these — quite honestly — schlock channels no one watches, and they get 5 or 10 cents [per subscriber, per month],” says Vasily Karasyov, senior media analyst at Susquehanna Financial Group. “Now it’s time to decide which kid doesn’t get to go to college.”

“For a long time, it was a question of how many channels you could offer a consumer,” explains cable industry consultant Steve Effros. “That is now changing. We have reached a point of diminishing returns because the Internet offers an infinite number of channels.”

One reason is cable companies no longer make most of their money selling video services. “They want to sell high-speed Internet and phone,” says Karasyov. “What they care about is, ‘If I don’t have this channel, will I lose video subscribers to whom I can upsell other stuff?’ ”

Channels on the new endangered list are already aware that they need to ramp up their value and increase their audience or face extinction. Consider the case of Reelz Channel, which recently laid off nine of its 118 employees and is now restructuring its programming.

Stan E. Hubbard, CEO of Reelz, says the network has lost more than $100 million since it launched in 2006 and still isn’t profitable. He describes recent layoffs as part of a new focus on scripted shows that will bring attention to the network — and, he hopes, a lot more viewers.

For instance, in December, Reelz canceled Sam Rubin’s Hollywood Uncensored while paying big bucks (for basic cable) for the scripted series True Justice, starring Steven Seagal, and the miniseries After Camelot, a follow-up to its biggest success to date, 2011’sThe Kennedys, which drew as many as 1.9 million viewers (for multiple airings of each episode).

Kennedys opened Hubbard’s eyes to what Reelz could do, even in only 65 million TV homes. “That’s our benchmark now," he says. "We’re trying to do things that can help us achieve the same kind of success.”

Still, admits Hubbard, “It’s a hard business model in a 100-plus-channel universe.”

Reelz gets by selling ads but can’t demand subscriber fees because it doesn’t deliver ratings and isn’t bundled with a group of channels such as those owned by Viacom and Disney. Hubbard hopes that will change within two years with new programming, but by then his losses will be closer to $200 million on annual revenue of about $40 million.

Brad Samuels, executive vp distribution at Ovation, admits his channel’s post-Time Warner drop from 51 million TV homes to about 44 million will hurt ad sales and cost it the 7-cent sub fee it has been collecting.

In the case of Current TV, the loss of Time Warner Cable means its reach into American TV homes drops from about 60 million to less than 48 million homes. That means it will lose its subscriber fees from TWC of about 12 cents per customer each month, which Karasyov says it was able to command only because of co-founder Al Gore’s projections at the time. Those ratings promises have never been met, while the cost of doing business goes up and up.

“If you’re an under-distributed network and you’re not part of a conglomerate, or if you are another small independent channel, you’re scared right now,” says Karasyov.

Samuels insists Ovation will find other ways to reach consumers, including satellite and telephone company services as well as new media platforms that feature interactivity and second screens like mobile. “We feel strongly Ovation is worth every penny that we charge,” he says, predicting that Time Warner will face a customer backlash for dropping the channel. “I still believe independent networks are important to the industry.”

For those who can manage the transition, a new business model must emerge. “The offering of programming has changed because of the Internet,” says Effros. “If you are a niche channel, if you are very tightly targeted, there is a serious question of whether you want to market directly to your audience” on the web.

Hubbard’s family’s broadcasting company, still run by his father, has financed Reelz and also is an investor in Ovation. Reelz headquarters were moved to Albuquerque, N.M., to cut costs, but now the future rests mostly on shows to be made by outside hired producers.

Hubbard says he will actually hire more new employees than were laid off as they shift Reelz toward production of its own reality shows and the development of more scripted programming.

Rubin, entertainment editor at KTLA in Los Angeles, will continue to work with Reelz on awards shows and other special projects, says he understands why Hubbard is making moves. “This is his personal gamble,” explains Rubin. “This is his personal money. I think he’s trying to spend it as judiciously as he can, but he is not afraid to spend it.”

“If we knew what was involved and how long it would take to get to the point we’re at right now, I’m not sure we would have made this investment,” says Hubbard. “But now we’re so close to turning the corner, it’s an easy investment to keep making.”